Process Costing

Learning Objectives (1 of 2)
Contrast process costing and job order
costing
Explain why equivalent units of production
are used in process costing
Calculate equivalent units of production, unit
costs, and inventory values using weighted
average method of process costing
 Learning Objectives (2 of 2)
Compute equivalent units of production, unit
costs, and inventory values using FIFO
method of process costing
Explain how standard costs are used in a
process costing system
Explain why a company would use a hybrid
costing system
 Job Order vs. Process Costing
Job Order Process Costing
Assign costs to job Using an averaging
and then to units technique, assign costs
within the job directly to units
produced during the
period
 Process Costing
Averaging technique to assign
costs to units produced

Unit Cost = Production Costs

Production Quantity
 Process Costing
The Numerator - Production Costs
Accumulate costs by department
Accumulate costs by product
Direct material from material requisitions
Direct labor from time sheets and wage rates
Overhead
Actual
Predetermined application rates
Unit Cost = Production Costs
Production Quantity
 Process Costing
Production Costs
Direct material from material requisitions
Direct labor from time sheets and wage rates
Overhead
Actual
Predetermined application rates
 Process Costing
The Denominator - Units Produced
Complicated by work in process
Units started last period and completed this
period
Units started this period and not completed
Convert partially completed units to
equivalent whole units

Unit Cost = Production Costs

Production Quantity
 Equivalent Units of Production (EUP)
Approximation of the number of whole
units of output that could have been
produced from the actual effort expended
Includes units
started last period and finished this period
started and finished this period
started this period and not finished
Assumes FIFO physical flow through the
production department
 Two Process Costing Methods
Weighted Average Method
combines
beginning work in process
current period production
FIFO Method
separates
beginning work in process
current period production
 Process Costing
Direct material
added at the beginning, during, and/or at the end of
process
Direct labor
added throughout the process
Overhead
added throughout the process
based on direct labor
based on other, multiple cost drivers
 Process Costing Steps
1 Units to account for
2 Units accounted for Units
3 Determine equivalent units
4 Costs to account for
5 Compute cost per equivalent unit Costs
6 Assign costs to inventories
 Step 1 - Units to Account For
Beginning WIP 5,000
Started 200,700
Units to account for 205,700
 Step 2 - Units Accounted For
Beginning WIP 5,000
Started 200,700
Units to account for 205,700
must
Finished and transferred 203,000 be
Ending WIP 2,700 equal
Units accounted for 205,700
 Step 3 - Compute Equivalent Units
DM Conversion
Beginning WIP inventory 5,000 5,000
Started and completed 198,000 198,000
Ending WIP inventory 2,700 2,160*
Equivalent units 205,700 205,160

* ending units * % complete

2,700 * 80% = 2,160
Weighted Average Method
 Step 4 - Costs to Account For
DM Conversion Total
Beginning WIP $ 5,943 $ 16,758 $ 22,701
Current costs 321,120 660,270 981,390
To account for $327,063 $677,028 $1,004,091

Weighted Average Method

 Step 5 - Cost per Equivalent Unit
DM Conversion Total
Beginning WIP $ 5,943 $ 16,758 $ 22,701
Current costs 321,120 660,270 981,390
To account for $327,063 $677,028 $1,004,091

Divide by EUP 205,700 205,160

Cost per EUP $1.59 + $3.30 = $4.89
Weighted Average Method
 Step 6 - Assign Costs to Inventories
Transferred (203,000 * $4.89) $992,670
Ending WIP Inventory Transferred
Direct Materials Out Ending
(2,700 * $1.59) $ 4,293 WIP
Conversion Costs
(2,700 * 80% * $3.30) 7,128 11,421
Cost accounted for $1,004,091*
*must agree with costs to account for
Weighted Average Method
 Process Costing - FIFO
Emphasizes current period costs and production
Steps 1 and 2 are the same
 Process Costing - FIFO
Step 3
DM Conversion
Beginning WIP/completed 0 3,000*
Started and completed 198,000 198,000
Ending WIP Inventory 2,700 2,160
Equivalent units 200,700 203,160

* beginning units * % complete in current period

5,000 * 60% = 3,000
 Process Costing - FIFO
Step 4 is the same
Step 5
DM Conversion Total
Current costs $321,120 $660,270 $981,390

Divide by EUP 200,700 203,160

Cost per EUP $1.60 + $3.25 = $4.85

 Step 6 Assign Costs to
Transferred
Inventories - FIFO
Beginning WIP Inventory $22,701
Cost to complete
Conversion (3,000 * $3.25) 9,750 $ 32,451
Started and completed
(198,000 * $4.85) 960,300
Total cost transferred Transferred $992,751
Ending inventory Out Ending
Direct Materials
(2,700 * $1.60) $4,320 WIP
Conversion Costs
(2,7000 * 80% * $3.25) 7,020 11,340
Cost accounted for $1,004,091*
*must agree with costs to account for
 Process Costing Comparison
Weighted Average FIFO
EUP DM 205,700 EUP DM 200,700
EUP Conversion 205,160 EUP Conversion 203,160
Cost per unit DM $ 1.60
Cost per unit DM $ 1.59
Cost per unit Conv. 3.25
Cost per unit Conv. 3.30
Total $ 4.85
Total $4.89 Transferred Out $ 992,751
Transferred Out $992,670 Ending WIP 11,340
Ending WIP 11,421 Total $1,004,091
Total $1,004,091
 Process Costing
The purpose of the six steps
Assign a value to ending work in process
Assign a value to items transferred out
Prepare this journal entry
Finished Goods
Work in Process
or
Transferred In Cost (successor department)
Work in Process (current department)
Process Costing with Standard Costs
Simplify costing process
Eliminate periodic cost recomputations
Same as FIFO computations
emphasize current period costs and production
Inventories are stated at standard cost
Variances are calculated for material, labor,
and overhead
Process Costing with Standard Costs
Assigns a normal production cost to the
equivalent units of output each period
Allows managers to quickly recognize and
investigate significant deviations from
expected production costs
Allows benchmarking with other firms
 Hybrid Costing Systems
Characteristics of job order and process
costing systems
Various product lines
different direct material - job order costing
different direct labor job order costing
same process - process costing
Hybrid costing used for furniture, clothing,
jam
 Questions
What is an equivalent unit of production?
What is the difference between the
weighted average and FIFO methods of
calculating equivalent units?
Why would a company use a hybrid costing
system?